They have advisors who trade individual bonds instead of high yield funds | Jobs Vox

Higher bond yields, brought on by the Federal Reserve’s efforts to curb inflation, have reversed a decades-old trend of captive bond funds buying into individual bonds.

Interest in investing in individual bonds is driven in part by technology platforms that make bonds easier to trade, but also suggests more aggressive and tactical efforts by advisors to take advantage of the current interest rate cycle.

“With higher rates, advisors are selling mutual funds and buying individual bonds and building ladder portfolios for their clients,” said Dave Rudd, president of fixed income distribution and trading firm InsperX.

Analyzing FINRA and CIFMA data, Rudd found that at the end of the third quarter this year, individual investors held $4.31 trillion in debt securities, up from $3.29 trillion a year earlier.

While direct ownership of bonds is rising, indirect ownership by funds fell to $5.05 trillion at the end of the third quarter from $5.86 trillion a year ago.

In contrast, stocks held indirectly fell from $16.3 trillion to $12.4 trillion, and stocks held directly fell from $30.7 trillion to $24.3 trillion.

Stocks and bonds have generally fallen in value over the past year, so the data includes market performance. But Rudd argues that the history of individual bond ownership is important and reflects a turning point in the way advisors construct fixed income allocations.

“It’s a huge shift away from mutual funds and into individual bonds,” he said. While it’s easy to get clients into packaged products, advisors are finding value in using individual bonds.

In November, InsperX surveyed nearly 300 advisors across multiple channels and found that advisors are turning to individual bonds to improve client relationships, leverage and increase alpha.

Among advisors using individual bonds, 82% are building bond ladders for their clients.

A key driver of the appeal of individual bonds, according to Rudd, are technological advances that increase access and transparency around bond trading.

Rudd hailed it as a positive sign that access and transparency have replaced the challenges associated with bond pricing as the biggest headache for advisers trying to trade bonds.

When advisors are asked why they don’t use individual bonds, the main reasons are that clients don’t ask, managed products are easy to use, and evaluating individual bonds is time-consuming.

“The focus has shifted to pricing and valuation,” Rudd said. “That’s good news because we’re trying to reach out and get clarity.”

Beyond fixed income, advisors expressed optimism about the markets and economy in the coming year.

About half of survey respondents said they expect the stock market to gain at least 10 percent in 2023, including 13 percent of advisors who expect stocks to gain 20 percent or more.

But overall equity volatility is set against a backdrop of an inverted yield curve that could last at least through the first half of 2023.

Three-quarters of respondents believe the 2-year Treasury yield will be higher than the 10-year Treasury for several months.

Inflation, on the other hand, is less of a concern, with 74% of respondents saying inflation has peaked.

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